Address:35-37 Ludgate Hill London EC4M 7JN Email address:info@oakhalladvisors.com Phone number:+44 (0)20 3393 0633

2016 – financial and operating discipline required

20/02/2016

“Operating a startup … requires a financial and operating discipline that we haven’t seen in startupland for quite a while”  writes Tomasz Tunguz, VC at Redpoint, in his recent post looking at the implications for the private funding world of the collapse in public company valuations. Businesses that last year might have attracted funding by growing 400% a year but losing multiples of revenue in the process would now do better with 50% growth and cash flow breakeven. As he notes, this type of discipline hasn’t been needed at start-ups for a while, which is something we highlighted back in an August Insight. If you or a private business you know need some fast-track analytical or financial articulation expertise from a team of experienced equity analysts, call or email us for a chat.

Tomasz looks at a basket of listed SaaS and other “new software” businesses. The SaaS  charge was of course led by Salesforce.com which IPO’d in 2004. It has been followed in recent years by SaaS poster-grandchildren Workday, Demandware, Splunk and others.

We’ve been watching the SaaS public market with interest since its early 2014 peak and subsequent sharp fall. Although share prices recovered, valuations continued to decline as the chart above shows. Public and private markets have been disconnected for some years and private valuations continued to soar despite what was happening to listed stock valuations.

We wrote about this in our Private valuation high-wire act post back in August 2015, which ended with a quote from the CEO of failed start-up Zirtual on the topic of cash burn: “Burn is that tricky thing that isn’t discussed much in the Silicon Valley community”.  Financial discipline was certainly lacking at that company. UK unicorn Powa Technologies, which just went into administration after eight years, minimal revenue, and $200m or so of funding, looks to be in a similar position. For a while Powa’s EV/Sales exceeded 100x, higher than Uber.

In November Square floated at a discount to its apparent previous VC round valuation. Square’s IPO was widely seen as marking the end of the VC boom of recent years –  and the Q4 2015 VC funding dip was widely reported.

Oakhall has been working with listed and private companies working on business and financial modelling, market sizing, articulation of competitive position and business model, and investor presentations and relations. Any business that is beyond early-stage funding needs a professional approach to investor communications and few have professional equity analyst experience in-house. Applying an equity analyst approach also helps better manage the businesses. We work on a retainer or project basis and can be contacted at +44 (0)20 3393 0633 or info@oakhalladvisors.com.

Relevant Links:
Tomasz Tunguz – The 57% drop in SaaS valuations
Oakhall – Private valuation high-wire act
Oakhall – Unicorn valuations: Square’s uncommon stock
CBInsights – RIP good times VC funding Q4 2015
To create your own SasS basket upload this OFX file into Google Finance.

Andrew Griffin spent almost two decades as a technology equity analyst before working in investor relations, corporate development and market intelligence for a UK listed software company. In 2015 he set up Oakhall to provide smart financial analysis and articulation for European public and private companies.